Alexander, William E., Tomas J.T. Baliño, Charles Enoch, Francesco Caramazza, George Iden, David Marston, Johannes Mueller, Ceyla Pazarbasioglu, Marc Quintyn, Matthew Saal, and Gabriel Sensenbrenner, 1995, The Adoption of Indirect Instruments of Monetary Policy, IMF Occasional Paper 126 (Washington: International Monetary Fund).
- Search Google Scholar
- Export Citation
)| false Alexander, William E., Tomas J.T. Baliño, Charles Enoch, Francesco Caramazza, George Iden, David Marston, Johannes Mueller, Ceyla Pazarbasioglu, Marc Quintyn, Matthew Saal, and Gabriel Sensenbrenner, 1995, , IMF Occasional Paper 126 ( The Adoption of Indirect Instruments of Monetary Policy Washington: International Monetary Fund).
Baliño, Tomás J.T. and Lorena M. Zamalloa, 1997, eds., Instruments of Monetary Management. Issues and Country Experiences, (Washington: International Monetary Fund).
Bernanke, Ben S., Thomas Laubach, Frederic Mishkin, and Adam S. Posen, 1999, Inflation Targeting. Lessons from the International Experience (Princeton University Press)
Blejer, Mario I., Alfredo M. Leone, Pau Rabanal, and Gerd Schwartz, 2001, “Inflation Targeting in the Context of IMF-Supported Adjustment Programs,” IMF Working paper 01/31 (Washington: International Monetary Fund).
Blejer, Mario I. and Liliana Schumacher, 2000, “Central Banks Use of Derivatives and Other Contingent Liabilities: Analytical Issues and Policy Implications”, IMF Working Paper 00/66 (Washington: International Monetary Fund).
Borio, Claudio E.V., 1997, “The Implementation of Monetary Policy in Industrial Countries: A Survey,” Bank for International Settlements Economic Papers No. 47 (Basel).
Caprio Gerard Jr. and Patrick Honohan, 1991, “Excess Liquidity and Monetary Overhangs”, World Bank Working Paper (Financial Policy and Systems) No 796 (Washington).
Fischer, Stanley, 1997, “Applied Economics in Action: IMF Programs”, in: American Economic Association Papers and Proceedings, Vol. 87, No. 2, pp. 23–27.
Hooyman, Catharina J., 1997, “Use of Foreign Exchange Swaps by Central Banks”, in: Baliño, Tomas J.T. and Lorena M. Zamalloa, 1997, eds., Instruments of Monetary Management. Issues and Country Experiences, (Washington: International Monetary Fund), pp. 148172.
- Search Google Scholar
- Export Citation
)| false Hooyman, Catharina J., 1997, “ Use of Foreign Exchange Swaps by Central Banks”, in: Baliño, Tomas J.T.and Lorena M. Zamalloa, 1997, eds., Instruments of Monetary Management. Issues and Country Experiences, ( Washington: International Monetary Fund), pp. 148172.
International Monetary Fund, 1987, Theoretical Aspects of the Design of Fund-Supported Adjustment Program, Occasional Paper No. 55 (Washington).
International Monetary Fund, Brazil-Memorandum of Economic Policies and Technical Memorandum of Understanding, November 12, 1999 and April 20, 2000 (Washington).
Kochhar, Kalpana, 1996, “The Definition of Reserve Money: Does It Matter for Financial Programs?”, IMF Paper on Policy Analysis and Assessment PPAA/96/9 (Washington: International Monetary Fund).
Mishkin, Frederic S., 1999, “International Experiences with Different Monetary Policy Regimes,” in: Journal of Monetary Economics, Vol. 43, No. 3 (June), pp. 579–605.
Mussa, Michael, Paul Masson, Alexander Swoboda, Esetban Jadresic, Paulo Mauro, and Andrew Berg, 2000, Exchange Rate Regimes in an Increasingly Integrated World Economy, IMF Occasional Paper 193 (Washington: International Monetary Fund).
Mussa, Michael, and Miguel Savastano, 1999, “The IMF Approach to Economic Stabilization,” IMF Working Paper WP/99/104 (Washington: International Monetary Fund).
Polak, Jacques J., 1957, “Monetary Analysis of Income Formation and Payments Problems”, reprinted 1977 in: International Monetary Fund, The Monetary Approach to the Balance of Payments, pp. 15-64 (Washington).
Polak, Jacques J., 1997, “The IMF Monetary Model at Forty”, IMF Working Paper WP/97/49 (Washington: International Monetary Fund).
Schadler, Susan; Bennett, Adam; Carkovic, Maria; Dicks-Mireaux, Louis; Mecagni, Mauro; Morsink, James H J; Savastano, Miguel A, 1995, IMF Conditionality: Experiences Under Stand-by and Extended Arrangements, Part I: Key Issues and Findings, IMF Occasional Paper No. 128, (Washington: International Monetary Fund).
- Search Google Scholar
- Export Citation
)| false Schadler, Susan; Bennett, Adam; Carkovic, Maria; Dicks-Mireaux, Louis; Mecagni, Mauro; Morsink, James H J; Savastano, Miguel A, 1995, , IMF Occasional Paper No. 128, ( IMF Conditionality: Experiences Under Stand-by and Extended Arrangements, Part I: Key Issues and Findings Washington: International Monetary Fund).
Schaechter, Andrea, Mark R. Stone, and Mark Zelmer, 2000, Adopting Inflation Targeting: Practical Issues for Emerging Market Countries, IMF Occasional Paper 202 (Washington: International Monetary Fund).
Van’t dack, Jozef, 1999, “Implementing Monetary Policy in Emerging Market Economies: An Overview of Issues,” in: Bank for International Settlements Policy Papers No. 5, (Basel), pp. 3–72.
This paper has benefited greatly from comments by Agnes Belaisch, Mariano Cortes, George Iden, Timothy Lane, Bernard Laurens, Lorenzo Perez, Robert Price, Christine Sampic, Mark Stone, Mark Swinburne, Piero Ugolini, Mark Zelmer, and participants of an internal IMF seminar (May 24, 2001).
In this paper foreign exchange interventions always refer to unsterilized interventions. Sterilized interventions normally have other than monetary policy purposes.
A few countries have in the past used a combined index of a money market rate and the exchange rate as an operating guide, the so-called monetary conditions index (MCI) (Canada and New Zealand; Sweden has used it as an indicator for future demand and inflation). Since the use of an MCI has some caveats, however, it is to-date not used as a formal operating target by any country.
The discussion on the role of instruments, targets, and indicators dates back to the early 1970s. See, for example, Friedman (1975).
For a tabular summary of the pros and cons of price versus quantity operating targets see Appendix Table 1.
Nevertheless, even central banks that target a short-term interest rate continue to monitor and forecast the development of central bank balance sheet items, in particular banks reserves, since they indicate how much liquidity the central bank needs to withdraw or inject into the banking system.
.Prominent exceptions have been Switzerland and New Zealand. Until 1999 Switzerland targeted the monetary base, as operating and intermediate target, and New Zealand the level of excess reserves (settlement balances). In the United States, the Fed targeted unborrowed reserves during the brief period from 1979-1981.
For an overview on alternative monetary policy frameworks see Mishkin (1999), for a discussion on exchange rate targeting see Mussa and others (2000), for inflation targeting see Bernanke and others (1999) and Schaechter and others (2000).
In this case to achieve the desired monetary base effects will require sizable interest rate adjustments. Also, shifts in base money demand can result in large interest rate swings with possibly negative impacts on the financial sector.
Other determinants for the choice of policy instruments are the development of the financial sector and historical or political factors. For an overview on the design and merits of alternative monetary policy instruments see Baliño and Zamalloa (1997) and Alexander and others (1995). For country practices with operating procedures and policy instruments see Borio (1997) and Van’t dack(1999).
A downside of the more flexible procedure is that signaling is no longer unambiguous. Setting a minimum bidding price when the central bank auctions liquidity and a maximum price when it auctions deposits is a possibility to enhance the signaling role for interest rates, but it also has disadvantages. Some central banks have also announced a range of liquidity, instead of a specific amount, they are willing to allot in the auction. While this gives counterparts some indication on the quantity the central bank aims to inject or absorb, it also allows the central bank room to avoid too strong fluctuations of interest rates.
Exchange rate variations itself should not have any impact on the central bank’s balance sheet and the liquidity situation of the banking system. While they are booked in the revaluation account, they have a counter position in the central bank’s capital. In some countries, revaluation gains are transferred monthly to the government and if used for transactions will effect liquidity.
See Blejer and Schumacher (2000) for a discussion of the rationale for a central bank to engage in operations involving contingent liabilities. The authors also argue for a portfolio approach that would aggregate all on and off-balance sheet transactions to obtain “economic” rather than “accounting” values of all items.
Under floating exchange rates, external objectives are usually viewed in broader terms such as medium-term current account sustainability.
As of end-June 2001 an NDA ceiling for the central bank has been applied for more than 80 percent of the countries supported by an IMF program. This excludes countries with currency broad arrangements or no separate legal tender for which this type of monetary conditionality is not applied. Moreover, in three cases the NDA ceiling related to the entire banking system. The monetary base has only been used in four cases as a performance criterion, sometimes in addition, sometimes in place of an NDA ceiling. NIR floors for the central bank, on the other hand, have been applied in all cases.
Strictly speaking, NDA is not a pure “net” variable. Claims against banks are mostly gross, since bank reserves are excluded from NDA. Banks’ deposits with the central bank are only part of NDA insofar as they result from a deposit facility or auctioned deposits.
See also Blejer and others 2001 who argue that NDA ceilings are problematic for inflation targeting countries. The central bank’s operating target predominantly determines the appropriateness of NDA ceilings as a performance criterion. What type of operating target a central bank chooses to steer is closely related to the monetary policy strategy as described in Section II.C.
NIR floors, however, can retain their function as performance even when central banks target short-term interest rates. NIR floors ensure that central banks do not draw down their foreign reserves to an extent that jeopardizes the external viability.